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Question Paper Financial Accounting (MB131) : April 2003

Part A : Basic Concepts (30 Points)

• This part consists of questions with serial number 1 - 30.

• Answer all questions.

• Each question carries one point.

• Maximum time for answering Part A is 30 Minutes.

1. The accounting concept of money measurement is evident under which of the following circumstances?

a. Making provision for doubtful debts and discount on debtors b. Recording all transactions at a price paid for it c. Recording non-monetary fixed assets at historical cost less accumulated depreciation d. Recording all events/transactions through a common denominator, namely the monetary

unit e. Both (c) and (d) above.

2. Amortization of unidentified intangible assets is in terms of

a. Conservatism concept b. Going concern concept c. Matching concept d. Time period concept e. Business entity concept.

3. Consider the following data pertaining to AB Ltd.:

Particulars Rs. Cost of the machinery purchased on April 1, 2002 6,60,000 Installation charges 40,000 Market value as on March 31, 2003 8,00,000

While finalizing the annual accounts, if the company values the machinery at Rs.8,00,000, which of the following concepts is violated by the company?

a. Cost b. Matching c. Realisation d. Periodicity e. Business Entity.

4. In double entry system of book-keeping, every business transaction affects

a. Two accounts b. The same account on two different dates c. Two sides of the same account d. Two accounts on two different dates e. Two accounts on the same side.

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5. Consider the following data pertaining to XL Ltd. for the month of March 2003:

Particulars Rs.

i. Balance as per Bank pass book (Overdraft) 5,100

ii. Bank charges for collection of up-country cheque 225

iii. Amount of interest on UTI deposits directly collected by the bank 425

Balance as per bank column of the cash book of XL Ltd. as on March 31, 2003 is

a. Rs.4,670 (Debit) b. Rs.4,700 (Credit) c. Rs.5,030 (Debit) d. Rs.5,300 (Credit) e. Rs.5,360 (Credit).

6. Which of the following errors will not cause a mismatch in the trial balance?

a. Recording a transaction in the wrong subsidiary book b. Posting to an account on the wrong side c. Omitting to write the cash balance in the trial balance d. Wrong casting of a subsidiary book e. Both (a) and (d) above.

7. Consider the following data with regard to plant and equipment pertaining to Mittal Ltd.:

Cost of the plant (Rs.) 5,00,000 Installation charges (Rs.) 30,000 Estimated useful life (years) 8 Scrap value (Rs.) 50,000

If the firm follows the straight line method of depreciation, the rate of depreciation is

a. 5.25% b. 6.00% c. 9.50% d. 10.10% e. 11.32%.

8. Consider the following data pertaining to Banjara Ltd. for the year 2002-2003:

Particulars Rs. Provision for doubtful debts as on April 1, 2002 8,000 Sundry debtors as on March 31, 2003 3,00,000 Bad debts to be written off 20,000

If the company makes 5% provision on the debtors balances, the charge against profit and loss account for the year ended March 31, 2003 is

a. Rs. 7,000 b. Rs.14,000 c. Rs.22,000 d. Rs.26,000 e. Rs.35,000.

9. Aslam Co. purchased furniture worth Rs.2,050 in exchange for its old furniture (book value of Rs.1,680), and a cash payment of Rs.600.

Amount of loss recognized on this transaction is

a. Rs. 230 b. Rs. 370 c. Rs. 600 d. Rs. 970 e. Rs.1,080.

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10. Which of the following is not an item of revenue expenditure?

a. Interest on deposits accepted b. Annual insurance premium on inventory c. Customs duty paid in connection with the import of equipment d. Repairs and maintenance on machinery e. Expenditure on assets like paper weight and pin cushion.

11. Which of the following is/are fixed asset(s)?

a. Closing inventory b. Fixed Deposit in a bank c. Patent d. Prepaid expenses e. Both (b) and (c) above.

12. Consider the following data pertaining to Moon Ltd. for the month of March 2003:

Particulars Rs. Purchase of goods for resale 1,86,000 Freight in 14,000 Freight out 12,500 Returns outward 6,000

Cost of goods available for sale is

a. Rs.1,88,000 b. Rs.1,89,000 c. Rs.1,94,000 d. Rs.1,99,500 e. Rs.2,01,500.

13. All non-cash transactions should be primarily recorded in

a. Double column cash book b. Analytical petty cash book c. Journal d. Cash book e. Ledger

14. Which of the following is/are source(s) of funds?

a. Disposal of an asset b. Payment to creditors c. Acceptance of bills payable d. Purchase of an asset e. Both (a) and (c) above

15. The expenses that have fallen due for payment but not paid are

a. Outstanding expenses b. Prepaid expenses c. Deferred expenses d. Accrued revenues e. Capital expenses

16. Which of the following concepts assumes that a business will last indefinitely?

a. Business entity b. Going concern c. Periodicity d. Duality e. Consistency.

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17. According to which of the following accounting concepts consolidated financial statements are prepared when a parent-subsidiary relationship exists?

a. Going concern b. Business entity c. Materiality d. Cost e. Periodicity

18. Which of the following factors is used as multiplier of super profits in valuation of goodwill of a business?

a. Average capital employed in the business b. Simple profits c. Number of years’ purchase d. Normal rate of return e. Normal profits.

19. XLNT Ltd. purchased 12% bonds with a face value of Rs.2,00,000 at a discount of 15% in the open market as investments and intends to hold them to maturity. The market value of the investments is Rs.1,80,000. The investments should be accounted at

a. Rs.2,24,000 b. Rs.2,00,000 c. Rs.1,84,000 d. Rs.1,80,000 e. Rs.1,70,000.

20. Which of the following statements is false with regard to consolidated financial statements?

a. The object of consolidated financial statement is to present financial position of a parent and its subsidiary as a single economic activity

b. These are prepared in the same format as that followed by the parent, for preparation of its separate financial statements

c. These are not substitutes for separate financial statements d. Dissimilar activities of parent and its subsidiary can be a reason for non-preparation of

consolidated financial statements e. Their preparation is made mandatory by Securities Exchange Board of India (SEBI).

21. XY Ltd. has a share capital of 6,000 equity shares of Rs.100 each having a market value of Rs.176 per share. The company wants to raise additional funds and offers to existing equity shareholders the right to apply for a new share at Rs.106 per share for every four shares held by them. The value of right is

a. Rs.176 b. Rs.120 c. Rs. 56 d. Rs. 40 e. Rs. 14.

22. H. Ltd. acquired 80% shares of S. Ltd. on December 1, 2002. S. Ltd. owed Rs.50,000 for purchase of stock from H. Ltd. The entire stock was held by S. Ltd. as on March 31, 2003. H. Ltd. made a profit of 30% on selling price. The unrealized profit on that stock was

a. Rs.16,000 b. Rs.15,000 c. Rs.14,400 d. Rs.12,000 e. Rs.10,000.

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23. Aski Ltd purchased land and building from Cibera Company for a book value of Rs.2,00,000. The consideration was paid by issue of 12% debentures of Rs.100 each at a discount of 20%. The debenture account is credited with

a. Rs.2,60,000 b. Rs,2,50,000 c. Rs.2,40,000 d. Rs.1,00,000 e. Debentures cannot be issued otherwise than for cash.

24. The excess price received over the par value of shares, should be credited to

a. Calls-in-advance account b. Share capital account c. Reserve capital account d. Securities premium account e. Share allotment account.

25. Rights shares are the shares

a. Issued by a newly formed company b. Legally issued to the public at large c. Offered to the existing equity shareholders d. That have a right of redemption e. That have a right to cumulative dividends.

26. On July 1, 2002, Delux Ltd. purchases 100 of its own 12% debentures for a price of Rs.9,900 which is the cum-interest price. The company pays interest half-yearly on September 30 and March 31 every year. The cost of 100 debentures is

a. Rs.10,300 b. Rs.10,000 c. Rs. 9,900 d. Rs. 9,700 e. Rs. 9,600

27. Amazon Ltd. issued 20,000 shares of Rs.100 each at a premium of Rs.10 per share, of which 18,000 shares are subscribed for. The amount to be paid is as follows:

Rs.60 - on application, including premium of Rs.10 Rs.30 - on allotment Rs.20 - on first and final call.

Call money was not received on 1,000 shares. On forfeiture of these shares, the amount standing to the credit of securities premium account is

a. Rs.2,00,000 b. Rs.1,80,000 c. Rs.1,60,000 d. Rs.1,40,000 e. Rs. 20,000.

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28. Consider the following data pertaining to Detofex Ltd.:

Particulars Rs. Nominal equity share capital 25,000 Issued and called-up capital 24,000 Paid-up capital 24,000 Calls in advance 1,000 20% Preference share capital (fully paid-up) 25,000

If the company declares a dividend of 20%, the total dividend payable is a. Rs.10,100 b. Rs.10,000 c. Rs. 9,900 d. Rs. 9,800 e. Rs. 9,500.

29. Consider the following data pertaining to Sapru Ltd. as on April 1, 2002:

Particulars Rs. 12% Debentures 50,000 Debenture sinking fund 40,000 Debenture sinking fund investment (represented by 18%,

secured bond worth Rs.46,000). 40,000

The company sold the investments at 80% on March 31, 2003 and the debentures were paid off. The loss incurred on account of sinking fund investment account is a. Rs.6,000 b. Rs.4,000 c. Rs.3,700 d. Rs.3,200 e. Rs.2,300.

30. Which of the following denotes the dividend declared by the directors between two annual general meetings?

a. Proposed dividend b. Final dividend c. Interim dividend d. Declared dividend e. Unpaid dividend.

END OF PART A

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Part B : Problems (50 Points)

• This part consists of questions with serial number 1 - 5

• Answer all questions.

• Points are indicated against each question.

• Detailed workings should form part of your answer.

• Do not spend more than 110 - 120 minutes on Part B.

1. In the month of April 2003, the accountant of Western Machinery Ltd. identified the following errors in the books of accounts for the year 2002-2003, in spite of the agreed balance sheet:

i. Closing stock was understated by Rs.5,100 due to a casting error in the stock register.

ii. Returns inward book was overcast by Rs.2,350.

iii. A sum of Rs.6,500, written off as depreciation on machinery, has not been debited to depreciation account.

iv. The total of Purchases day book was carried forward as Rs.83,900 instead of Rs.89,300.

v. A fixed deposit of Rs.40,000 with Dena Bank matured and Rs.47,740 was realized, which was credited to fixed deposit account.

vi. A collection of Rs.2,500 from Mr. Rakesh, a customer, was entered in the creditors account.

You are required to pass rectification entries for the above errors and compute the effect of corrections on the profit for the year 2002-2003.

(9 points)

2. On April 1, 2002 the balance of 12% Debentures of Rs.100 each of Roplas Ltd. was Rs.5,00,000. The company reserves the right to redeem the debentures in any year by purchase in the open market. Interest on debentures is payable on September 30 and March 31, every year.

On July 1, 2002, the company purchased 1,000 of its own 12% Debentures as investment at Rs.99 cum-interest.

The company cancelled its own 1,000 debentures on March 31, 2003.

You are required to pass journal entries in the books of the company for the above transactions for the year 2002-2003.

(8 points)

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3. Following is the trial balance of Shiva Ltd. for the year ended March 31, 2003:

Trial balance for the year ended March 31, 2003

Particulars Debit balance

(Rs.) Particulars

Credit balance (Rs.)

Opening stock 30,000 Purchases returns 28,000

Purchases 6,62,000 Sundry creditors 1,20,000

Sales returns 40,000 Sales 15,85,000

Sundry debtors 1,50,000 Discount received 10,400

Plant & machinery 6,50,000 Share Capital 7,00,000

Building 3,80,000 10% Debentures 4,80,000

Furniture & fixtures 1,40,000 Reserves & Surplus 1,80,000

Salaries 3,80,000

Wages 2,10,000

Rent, rates & taxes 80,000

Telephone expenses 1,23,000

Discount allowed 12,000

Insurance premium 5,400

Carriage inward 6,800

Carriage outward 8,200

Cash at bank 26,000

Investments (10%) 2,00,000

31,03,400 31,03,400

The company has furnished the following additional information:

i. Closing stock was valued at Rs.32,000 as on March 31, 2003.

ii. Goods worth Rs.4,000 were distributed by salesmen as free sample, but no entry has been made for this.

iii. Provide depreciation on the assets at the following rates: Building – 5%

Furniture & Fixtures – 5%

Plant & Machinery – 8%

iv. A cheque for Rs.4,000 received from a customer was dishonoured by the bank but the same has not been recorded in the books. The customer has become insolvent and 50% of the amount is expected to be realized from his estate.

v. A purchase invoice of Rs.6,000 received from a supplier has not been entered by oversight.

On the basis of above trial balance and additional information, you are required to prepare Trading and Profit & loss A/c for the year ended March 31, 2003 and Balance Sheet of the company as on that date.

(11 points)

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4. The following is the balance sheet of Daruwala Engineering Ltd. as on March 31, 2003:

Balance Sheet as on March 31, 2003

Liabilities Rs. Assets Rs.

Equity shares of Rs.10 each 8,00,000 Goodwill 30,000

General reserve 1,40,000 Machinery at cost 7,50,000

Profit & loss Account 2,30,000 Furniture 1,50,000

Provision for depreciation on Machinery

1,20,000 Building 3,00,000

Staff welfare fund 30,000 Stock 1,00,000

Proposed dividend 80,000 Sundry debtors 2,00,000

Sundry creditors 2,20,000 Bank 30,000

Advertisement suspense 40,000

Preliminary expenses 20,000

16,20,000 16,20,000

Other information:

i. Sundry debtors include Rs.20,000 which may be irrecoverable.

ii. Stocks are valued at Rs.80,000.

iii. Machinery and furniture are to be revalued at Rs.6,00,000 and Rs.1,80,000, respectively.

iv. Goodwill is to be valued at 4 years’ purchase of super profits.

v. Normal return on capital employed in similar business is 10%.

vi. Profits before tax for last four years are:

Year Profit (Rs.)

1999-2000 Rs.1,40,000

2000-2001 Rs.1,90,000

2001-2002 Rs.1,60,000

2002-2003 Rs.2,30,000

vii. Company profits are taxed at the rate of 35%.

viii. Depreciation on revaluation of assets may be ignored.

You are required to compute the value of each equity share of the company.

(12 points)

5. Hi-Hik Ltd issued 5,000 equity shares of Rs.10 each at a premium of Rs.2 per share payable as follows:

On application Rs.7 (including premium)

On allotment Rs.3

On first & final call Rs.2

The company has received 6,000 applications for 5,000 equity shares. The allotment was made on prorata. Excess application moneys were utilized towards dues on allotment.

Mr. Gaurav who held 200 shares, failed to pay allotment money and first & final call. These shares were forfeited. The company reissued 150 shares out of 200 forfeited shares to Mr. Sudhakar as fully paid for Rs.8 per share.

You are required to pass journal entries in the books of the company for the above transactions.

(10 points)

END OF PART B

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Part C : Applied Theory (20 Points)

• This part consists of questions with serial number 6 - 8.

• Answer all questions.

• Points are indicated against each question.

• Do not spend more than 25 -30 minutes on Part C.

6. Write short notes on:

a. Non-current liabilities

b. Intangible assets

c. Fixed assets.

(2 + 2 + 2 = 6 points)

7. Briefly explain with examples the Money Measurement Concept.

(7 points)

8. What is Value Added Statement? Explain the advantages of Value Added Statement

(7 points)

END OF PART C

END OF QUESTION PAPER

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Suggested Answers Financial Accounting (MB131) : April 2003

Part A : Basic Concepts

1. Answer : (d)

Reason : Recording, classification and summarization of business transactions requires a common unit of measurement which is taken as money. Thus, recording of all events, transactions through a common denominator depicts the money measurement concept. Making provision for doubtful debts and discount on debtors (a) is in terms of recognition of expenses as soon as they are reasonably possible which is implied in conservatism concept. Recording of all transactions at a price paid for it, (b) and recording of non-monetary fixed assets at historical cost less accumulated depreciation (c) are the resultants of cost concept. Thus, (d) is the correct answer.

2. Answer : (c)

Reason : Intangible assets are amortized like tangible fixed assets. If costs benefit more than one accounting period, they should be systematically and rationally allocated to all accounting periods. Matching concept involves recognizing costs as expenses on the basis of direct association with assets. Thus amortization of intangible assets is in systematic allocation of costs over a several periods in recognition of matching concept. The other concepts do not recognize allocation of costs of fixed assets. Conservatism concept is not meant to introduce a bias into financial reporting. It is a prudent reaction to uncertainty to try to ensure that inherent risks in business are adequately considered. Going concern concept (b) assumes that the business entity is assumed to be a going concern in the absence of evidence to the contrary. Time Period concept (d) requires accounting information to be reported at regular intervals to foster comparability. Business entity concept explains that in accounting business is to be considered as a separate entity from the owner. It does not speak about amortization.

3. Answer : (a)

Reason : In terms of cost concept the value of an asset is to be determined on the basis of acquisition cost. Valuation of machinery at market value is in violation of cost concept unless the machine is actually sold, realizable value will give only a hypothetical figure. Market value is highly subjective because to know the value of the asset one has to chase the uncertain future. The other concepts matching concept (b) deals with matching costs with revenue, Realization concept (c) deals with recognition of income at various levels of production, Periodicity concept (d) explains how the accounting information is to be reported at regular intervals to foster comparability, Business entity concept (e) explains the owner is different from the business entity. Thus, the concepts (b), (c), (d), and (e) do not explain how the fixed assets are to be recorded.

4. Answer : (a)

Reason : In double entry system of book-keeping every business transaction affects two or more than two accounts (a) one account affects debit aspect while the other credit aspect. It does not affect the same account on two different dates (b) nor two sides of the same account (c). It does not affect two accounts on two different dates (d) it does not affect same side of two accounts (e).

5. Answer : (d)

Reason :

Particulars Rs.

Overdraft balance as per bank pass book 5,100 Less: Bank charges on collection of upcountry cheques 225

4,875 Add: Interest on UTI deposits directly collected by the bank 425

Credit balance as per bank column of the cash book 5,300

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6. Answer : (a)

Reason : Making an entry in the wrong subsidiary book (a) will not cause a mismatch in the trial balance. The wrong recording is carried over at all stages and the trial balance is not affected by this wrong recording. The mistakes stated in other alternatives results in a mismatch in the trial balance. The posting of an amount on debit side instead of credit side or vice versa (b) omitting to write the cash balance in the trial balance (c) and wrong casting of a subsidiary book (d) affects the agreement of trial balance.

7. Answer : (e)

Reason : Depreciation =

Plant value - Scrap value

Life of the plant

= (Rs.5, 00, 000 + Rs.30, 000) Rs.50, 000

8 years

−

= Rs.5, 30, 000 Rs.50, 000

8 years

− =

Rs.4,80,000Rs.60,000

8 years=

= Rs.60,000

1005,30,000

× = 11.32%

8. Answer : (d)

Reason :

Particulars Rs. Opening Provision 8,000 Bad debts to be written off 20,000

Shortfall of provision 12,000 Provision required 5% of Rs.2,80,000 (Rs.3,00,000 – Rs.20,000) 14,000 Charge against profit and loss account 26,000

9. Answer : (a)

Reason :

Particulars Rs. Book value of old furniture 1,680 Add: Cash paid for exchange 600 2,280 Less: Value of new furniture 2,050 Loss recognized on this transaction 230

10. Answer : (c)

Reason : Revenue expenditure is incurred for day to day running of the business. Any item of expenditure which improves the earning capacity of a business entity or the expenditure incurred till the asset is ready for use is capital expenditure. From the viewpoint of this, the customs duty paid in connection with the import of equipment (c) is not revenue expenditure. The expenses mentioned in other alternatives Interest on deposits accepted (a) Annual insurance premium (b) repairs and maintenance (d) Expenditure on assets like paperweight (e) are items of revenue expenditure.

11. Answer : (c)

Reason : Fixed assets are for use over relatively long period and they are not meant for resale. Patents (c) satisfy the characteristics of fixed assets and are shown under the category of Fixed assets. Closing inventory (a) Fixed deposit in bank (b) and Prepaid expenses (d) are current assets. Thus (c) is the correct answer.

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12. Answer : (c)

Reason : Cost of goods = Purchases – Returns outward + Freight in

= Rs.1,86,000 – Rs.6,000 + Rs.14,000 = Rs.1,94,000.

13. Answer : (c)

Reason : The journal is said to be the book of first entry for all transactions which cannot be recorded in the cash book. Thus, all non-cash transactions should be recorded in the journal. The alternatives (a) Double column cash book and (d) Cash book are cash books where transactions involving cash and discount and cash alone are recorded and alternative (b) analytical petty cash book is meant for recording petty expenses and the alternative (e) Ledger is the main book of account where all transactions are posted and it contains a classified summary of all accounts.

14. Answer : (e)

Reason : In a business, funds can be raised by increasing liabilities and reducing assets. Thus alternative (a) reduction in asset and alternative (c) increase in liability are the sources of funds. The other alternatives (b) payment of creditors leads to reduction in liability and (d) purchase of an asset increases assets and they are uses of funds.

15. Answer : (a)

Reason : The nominal accounts record the actual expenses paid during the accounting period. The expenses which have fallen due for payment but have not been paid are the accrued expenses or outstanding expenses. The alternative (b) is the reverse of it i.e. these are the expenses which have not fallen due but paid in advance like insurance premium also known as unexpired expenses. The recorded expenses that are apportioned between two or more than two accounting periods (like huge expenditure on advertisement) is deferred expenditure (c) and the alternative (d) Accrued revenue is the portion of an income which has fallen due for receipt but has not yet been received. Capital expenses which increase the earning capacity of an entity and whose benefit yields for more than one accounting period (e) Thus, the alternatives (b), (c), (d) and (e) are not correct.

16. Answer : (b)

Reason : According to going concern concept (b), a business entity is assumed to carry on its operations forever. Seemingly inconsequential, this is a fundamental concept which has far reaching consequences. The other concepts, business entity concept (a) treats business distinct from the entity of its owners. According to the concept of periodicity (c) the income or loss of the business is measured periodically, one year is the usual accounting period. The duality (d) concept is also known as accounting equivalence concept implies that the uses of funds must be equal to the sources of funds i.e. Assets = owners’ Equity + outside liability. The liabilities and assets that appear in the Balance sheet are governed by this concept. The consistency concept (e) requires that once an entity has decided on one method of treating an event in recording it in books of accounts, it will treat all subsequent events of the same character in the same fashion. Thus, the alternative (b) is the correct answer.

17. Answer : (b)

Reason : Consolidated financial statements should reflect the economic activities of a business enterprise measured without regard to the boundaries of the legal entity. A parent and subsidiary are legally separate but are treated as a single business enterprise in consolidated statements, in recognition of Business entity concept (b). The other concepts do not explain about consolidation of financial statements. The Going concern concept (a) assumes that the business entity will continue to operate in the absence of evidence to the contrary. Materiality (c) requires reporting the information that has a value significant enough to affect decisions of those using the financial statements. Cost concept (d) explains how the assets are to be recorded in the books of accounts. According to this, fixed assets are to be recorded at cost less accumulated depreciation. Periodicity (e) explains that the financial accounting process is meant to provide the information about the economic activities of the business enterprise at regular intervals. It does not speak about consolidation of financial statements.

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18. Answer : (c)

Reason : Number of years’ purchase is the factor with which the super profits would have to be multiplied in order to arrive at the value of goodwill.

Super profits : Average annual profits – (Average capital employed x Normal rate of return)

Goodwill : Number of years’ purchase x super profits

19. Answer : (e)

Reason : The price of the bonds is at a discount of 15% on the face value of Rs.2,00,000. Thus, theacquisition cost (Face value – Discount)

Discount = Rs.2,00,000 x 15

100 = Rs.30,000

= Rs.2,00,000 – Rs.30,000 = Rs.1,70,000.

20. Answer : (d)

Reason : AS-21 deals with the objectives, scope and procedure of consolidation of financial statements. Dissimilar activities of parent and its subsidiaries cannot be the ground for non-consolidation of financial statements. Thus, statement in alternative (d) is false. As per AS 21, consolidation is not mandatory. But SEBI has made it mandatory for consolidation of financial statements (e). The object of consolidated financial statements is to present the financial status of parent and subsidiary as a single entity (a) and these are prepared as per the format followed by the parent company (b) and these are not substitutes for separate financial statements (c). Separate financial statements are to be prepared by the entities as per governing law. Thus, the statements in alternatives (a), (b), (c) and (e) are true.

21. Answer : (e)

Reason : Value of right R = r

N r+ (M – S)

= 1

4 1+ x (Rs.176 – Rs.106)

= 1

5x Rs.70 = Rs.14

22. Answer : (d)

Reason : Profit on stock = 30% of Rs.50,000 = Rs.15,000

Unrealized profit = Rs15,000 × 80% = Rs.12,000.

23. Answer : (b)

Reason : Sometimes the companies may go for issue of debentures towards consideration for purchase of fixed asset. In such cases, the debentures may be issued at par / at discount / at premium. In the present case, the journal entry will be:

For purchase of Land and Building:

i. Land and Building a/c. Dr. Rs.2,00,000

To Avanti & Company a/c. Rs.2,00,000

For issue of debentures at discount of 20%

ii. Avanti & Company a/c. Dr. Rs.2,00,000

Discount on issue of debentures Dr. Rs. 50,000

To 12% Debentures a/c. Rs.2,50,000

(Issue of 2,500 debentures of face value Rs.100 each at a discount of 20%)

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Thus 12% debentures are figured at Rs.2,50,000.

24. Answer : (d)

Reason : If by the terms of issue, the price payable is above the par value of shares, it is called an issue at premium. The amount so received is to be credited to securities premium account.

25. Answer : (c)

Reason : Rights shares are the shares that are offered to the existing equity shareholders (c). These are not issued by a newly formed company (a) They are not the shares issued to the public at large. They are issued only to the existing shareholders. (b). It does not indicate the right of redemption of shares issue (d). These are not the shares with cumulative dividend right.

26. Answer : (e)

Reason : The cum-interest price includes the interest accrued. If the company is required to pay the debenture interest for the accrued period, the price quoted is ex-interest. Thus, the removal of interest component from cum-interest price gives ex-interest price.

The interest accrued from April 1, 2002 to June 30, 2002 is for three months @ 12% on 10,000.

= 10,000 x 12 3

x100 12

= Rs.300

Cum-interest price – Interest = Ex-interest price i.e. cost of debentures

= Rs.9,900 – Rs.300 = Rs.9,600.

27. Answer : (b)

Reason : The amount received on account of securities premium is 18,000 shares x Rs.10 = Rs.1,80,000. There is no impact of forfeiture of shares on securities premium account. The amount of premium received is to be utilized as per the provisions of the Companies Act.

28. Answer : (d)

Reason : Dividend is paid on paid-up capital

Equity share capital + Preference share capital

= Rs.24,000 + Rs.25,000 = Rs.49,000

= 20% of 49,000 = Rs.9,800

29. Answer : (d)

Reason : The loss on account of disposal of sinking fund investments is Rs.3,200

Balance = Rs.40,000

Sale:

Rs.46,000 x .8 = Rs.36,800

Loss = Rs. 3,200

30. Answer : (c)

Reason : Though dividends can be declared only by a resolution of the shareholders, if the articles permit, the directors can declare an interim dividend (c) between two annual general meetings. The dividend recommended by the directors is termed as Proposed dividend (a) till such time it is approved by the shareholders in the AGM. The dividend finally decided by the shareholders in the AGM as payable is termed as Declared dividend (d). The unclaimed portion of it is un-paid/ un-claimed dividend (e). Final dividend (b) gives rise to an enforceable obligation.

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Part B : Problems

1. Western Machinary Ltd. Journal Entries

Particulars Dr. (Rs.) Cr. (Rs.) i. Opening Stock A/c. Dr. 5,100 To Profit & Loss Adjustment A/c. 5,100 (Being closing stock undercast by Rs.5,100 now rectified) ii. Suspense A/c. Dr. 2,350 To Profit & Loss Adjustment A/c 2,350 (Being returns inward book undercast by Rs.2,350, now rectified) iii. Profit & Loss Adjustment A/c. Dr. 6,500 To Suspense A/c. 6,500 (Being depreciation on Machinery not posted to depreciation a/c.

now rectified)

iv. Profit & Loss Adjustment A/c. Dr. 5,400 To Suspense A/c. 5,400 (Being the total carried forward as Rs.83,900 in place of Rs.89,300

(i.e. Rs.5,400 = Rs.89,300 – Rs.83,900) now rectified)

v. Fixed Deposit A/c. Dr. 7,740 To Profit & Loss Adjustment A/c. 7,740 (Being interest on fixed deposit wrongly credited to fixed deposit

a/c, now rectified)

vi. Creditors A/c. Dr. 2,500 To Debtors A/c. 2,500 (Being collection from debtors wrongly posted in the creditors A/c,

now rectified)

Dr. Profit & Loss Adjustment A/c. Cr.

Particulars Rs. Particulars Rs.

To Suspense A/c 6,500 By Opening Stock 5,100

To Suspense A/c 5,400 By Suspense A/c. 2,350

To Net Profit (transferred) 3,290 By Fixed deposit 7,740

15,190 15,190

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2. Roplas Ltd. Journal Entries

Date Particulars Dr.

(Rs.) Cr.

(Rs.) July 1, 2002 Own Debenture A/c. Dr. 96,000

Interest on Debenture A/c. Dr. 3,000 To Bank A/c. 99,000 (Being the purchase of 1000 own debentures at the rate of

Rs.99 cum interest. Interest for 3 months from April 1,2002 to June 30, 2002 is Rs.3,000)

Sep. 30, 2002 Interest on debenture A/c. Dr. 27,000 To Bank A/c. 24,000 To Interest on own Debenture A/c. 3,000 (Being the payment of interest on 4,000 debentures for 6

months and 1,000 debentures for 3 months).

(4000 × Rs.100 × 12% × 12

6; 1000 X Rs100 x 12% ×

12

3)

March 31, 2003 Interest on Debenture A/c. Dr. 30,000 To Bank A/c. 24,000 To Interest on own Debentures A/c. 6,000 (Being the payment of half yearly interest held by outside

debenture holders and by the company itself)

Profit & loss A/c. Dr. 60,000 To Interest on Debenture A/c. 60,000 (Being the transfer of interest on debentures to profit & loss

A/c.)

Interest on own debenture A/c. Dr. 9,000 To Profit & loss A/c. 9,000 (Being the transfer of interest on own debentures to profit &

loss A/c.)

12% Debentures A/c. Dr. 1,00,000 To Own debenture A/c. 96,000 To Capital reserve A/c. 4,000 (Being the profit on redemption of debentures transferred to

capital reserve A/c.)

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3. SHIVA Ltd. Dr. Trading and Profit & Loss A/c. for the year ended March 31, 2003 Cr.

Particulars Rs. Rs. Particulars Rs. Rs. To Opening stock 30,000 By Sales 15,85,000 To Purchases 6,62,000 Less: Sales returns 40,000 15,45,000 Less: Purchases returns 28,000 By Advertisement (Free samples) 4,000 6,34,000 By Closing stock 32,000 Add: Purchases 6,000 6,40,000 To Wages 2,10,000 To Carriage inward 6,800 To Gross profit 6,94,200 15,81,000 15,81,000 To Salaries 3,80,000 By Gross Profit 6,94,200 To Rent, rates & taxes 80,000 By Discount received 10,400 To Telephone expenses 1,23,000 By Interest on investments 20,000 To Discount allowed 12,000 To Insurance premium 5,400 To Carriage outward 8,200 To Interest on debentures 48,000 To Advertisement 4,000 To Depreciation: Plant & machinery 52,000 Building 19,000 Furniture & fixtures 7,000 78,000 To Provision for insolvent customer 2,000 By Net Loss 16,000

7,40,600 7,40,600

Balance Sheet as on March 31, 2003

Liabilities Rs. Assets Rs. Share Capital 7,00,000 Fixed Assets: Reserves & surplus 1,80,000 Plant & Machinery 6,50,000 10% Debentures 4,80,000 Less: Depreciation @ 8% 52,000 5,98,000 Interest on Debentures 48,000 Buildings 3,80,000 Current Liabilities: Less: Depreciation @ 5% 19,000 3,61,000 Sundry creditors: 1,20,000 Furniture & fixtures 1,40,000 Add: Purchase invoice omitted 6,000 1,26,000 Less: Depreciation @ 5% 7,000 1,33,000

Investments 2,00,000 Interest on Investments 20,000 Current Assets: Closing stock 32,000 Sundry debtors 1,50,000 Add: Dishonored cheque 4,000 1,54,000 Less: Provision for

Insolvent customer 2,000 1,52,000 Cash at bank 26,000 Less: Dishonored cheque 4,000 22,000 Expenditure & losses: Profit & loss A/c. 16,000 15,34,000 15,34,000

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4. Daruwala Engineering Ltd. Computation of capital employed:

Rs. Rs. Sundry assets:

Machinery 6,00,000

Furniture 1,80,000 Building 3,00,000

Stock 80,000 Sundry debtors (Rs.2,00,000

– Rs.20,000)

1,80,000

Bank 30,000

13,70,000

Less: Proposed dividend 80,000

Sundry creditors 2,20,000 3,00,000

10,70,000 Less: ½ of adjusted current year’s

profit after tax

55,250

Average capital employed 10,14,750

Rs. Rs.

i. Profit for 2002-2003: 2,30,000 (–) Decrease in stock (20,000) (–) Bad debt provision (20,000) 1,90,000

ii. Computation of Average maintainable profit:

Average profit = Rs.1, 40, 000 Rs.1, 90, 000 Rs.1, 60, 000 1, 90, 000

4

+ + +

= Rs.6,80, 000

4 = Rs.1,70,000

Rs. Average Profit 1,70,000 Less: Corporate tax 35% 59,500

1,10,500 Less: Normal return on capital employed (10%

on Rs.10,14,750) 1,01,475

Super Profit 9,025

iii. Goodwill = 4 × Rs.9,025 = Rs.36,100

iv. Computation of net assets available to equity shares:

Capital employed 10,70,000

Goodwill 36,100

Net assets available to equity shareholders 11,06,100

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v. Value of each equity share = Rs.11,06,100 ÷ 80,000 = Rs.13.83

vi. Value of each equity share (cum dividend) = Rs.11, 06,100 Rs.80, 000

80, 000

+ = Rs.14.83

Note: Advertisement suspense is a fictitious asset and not included in sundry assets. Staff welfare fund is an appropriation of profits and is not an outside liability.

5. Hi-Hik Ltd. Journal Entries

Particulars Dr.

(Rs.) Cr.

(Rs.) Bank A/c. Dr. 42,000 To Equity Share Application A/c. 42,000 (Being the application money received on 6,000 shares at the rate of Rs.7 per share)

Equity Share Application A/c. Dr. 35,000 To Equity Share Capital A/c. 25,000 To Share Premium A/c. 10,000 (Being the amount transferred to Equity Share Capital A/c. and Share Premium A/c.)

Equity Share Allotment A/c. Dr. 15,000 To Equity Share Capital A/c. 15,000 (Being the allotment money due on 5,000 shares) Bank A/c. Dr. 7,680 Equity Share Application A/c. Dr. 7,000 To Equity Share Allotment A/c. 14,680 (Being the part of allotment money was adjusted from equity share application A/c. Balance amount of Rs.1.60 per share realized except on 200 shares)

Equity Share First & Final call A/c. Dr. 10,000 To Equity Share Capital A/c. 10,000 (Being the first & final call money due on 5,000 shares) Bank A/c. Dr. 9,600 To First and Final call A/c. 9,600 (Being the amount of first & final call received by the company except 200 shares held by Mr. Gaurav)

Equity Share Capital A/c. Dr. 2,000 To Equity Share Forfeiture A/c. 1,280 To Equity Share Allotment A/c. 320 To Equity Share First & Final call A/c. 400 (Being 200 shares held by Mr. Gaurav have been forfeited) Bank A/c. (150 Shares × Rs.8) Dr. 1,200 Equity Shares Forfeiture A/c. (150 shares × Rs.2) Dr. 300 To Equity Share Capital A/c. 1,500 (Being 150 shares were reissued at a price of Rs.8 per share fully paid) Equity Share Forfeiture A/c. Dr. 660 To Capital Reserve A/c. 660 (Being profit on reissue of 150 shares transferred to Capital Reserve A/c.)

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Working Notes:

(Rs.)

Amount received form 6,000 applicants 42,000

Less: Amount for 5,000 shares 35,000

Surplus money 7,000

Surplus amount per share = shares000,5

000,7.Rs = Rs.1.40.

Profit on reissue of shares:

(Rs.)

Amount received from 150 shares 150 shares × (Rs.5 +Rs.1.40)

960

Amount utilized as discount for reissue of shares 150 shares × Rs.2

300

Profit on reissue of forfeiture shares 660

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Part C: Applied Theory 6. a. Non-Current Liabilities

All such liabilities payable over a longer period of time, generally after one year, are non-current liabilities. Eg. Debentures, Long-term loans, etc.

b. Intangible Assets

The assets which do not have physical existence, and their real value depends upon the earning capacity of the business concern. Example Goodwill.

c. Fixed Assets

Fixed asset is an asset held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business.

Fixed assets often comprise a significant portion of the total assets of an enterprise, and therefore are important in the presentation of financial position.

Financial statements disclose certain information relating to fixed assets. In many enterprises these assets are grouped into various categories, such as land, buildings, plant and machinery, vehicles, furniture and fittings, goodwill, patents, trade marks and designs.

7. In financial accountancy, a record is made only of information that can be expressed in monetary terms. Recording, classification and summarization of business transactions requires a common unit of measurement, which is taken as money. If events cannot be quantified in monetary terms then they do not facilitate accounting. The activities and their attributes considered for inclusion in the financial statements will be based on the yardstick of whether they are amenable to be translated in currency terms. Money is the standard of exchange and the changes in purchasing power caused by inflation are ignored for the purpose of accounting because the assumption about the stability of money, notwithstanding its limitations, is a necessity for ensuring a smooth accounting process. Hence, all transactions are recorded through a common denominator, namely the monetary unit. Thus, if a certain event, no matter how significant for the health or even existence of the business, cannot be measured in monetary terms, such an event is not recorded in accounting. For example, purchase of an inconsequential asset, which is easily measured in rupee terms, is accounted for in the business. However, the retirement or death of the Chairman of a company, even though it has far reaching consequences for the health of the business is not accounted for, since no monetary measurement of the event is feasible.

Needless to say if different assets and liabilities are expressed in different measures they cannot be compiled to discern the financial health of the business. This difficulty is obviated if all the assets and liabilities are expressed in money terms. The total liabilities when deducted from the total assets yield the Net worth of the organization.

8. Value-added (VA) statement is the statement of profit that reflects the addition of wealth made by the organization with the efforts of management and employees using capital presented in a different form. VA statement is presented under two parts. In the first part, the value-added by the firm is arrived. In the second part, application of the added value by the firm is arrived.

Advantages of VA Statements

1. VA concept is the most relevant concept of the social responsibility concept of the enterprise. Social responsibility concept says that the organization is a social institution working for the benefit of many interested groups in the society. Thus, VA statement reflects the broader view of the company’s objectives and responsibilities. This enhances the attitude of the employees towards their employing firms.

2. VA statement can be taken as a means in introducing the productivity linked bonus scheme for employees.

3. VA based ratios can be used for comparisons with other companies and international comparisons.

4. VA statement can be used to measure the size and importance of a company in the economy. This statement shows the company’s contribution to national income.

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5. VA statement is formed on the basis of the general concepts like going concern, matching, consistency on which the current balance sheets and income statements are based. So, VA statement is a complementary to the existing statements.